Any investment gains in your IRA will eventually be taxed at your ordinary income rate, when money is withdrawn. IRA profits don’t qualify for the low tax rate on long-term capital gains. Here’s one way to deal with this problem:
* Keep your IRA money in a money market fund offered by a mutual fund family. Your returns may be low but there is little risk that you’ll lose money.
* Invest that money in a no-load stock fund from that fund family on the last one or two days of each month. Choose an index fund or a widely-diversified stock fund that captures broad market movements.
* Hold the stock fund for a week, then go back to cash.
* Go into the stock fund just before every stock exchange holiday and go back to cash after the holiday.
What does this accomplish? You’re in cash most of the time so your exposure to bear markets is reduced. Yet you’ll be in stocks at the right times: at the turn of each month, when corporate retirement plan contributions boost demand for stocks, and over each holiday, when short-sellers buy stocks to close their positions while they’re away.
Choose no-load funds to avoid sales costs and make sure there are no redemption fees on in-and-out moves. This strategy results in short-term gains, if it works, so it’s best suited for an IRA, where you won’t be sacrificing the tax break on long-term gains.
No investment strategy is guaranteed but this one has worked well over the years. You might start with a small portion of your IRA, to see how it works, and expand its use if you’re pleased.
